E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest - Transcripts

is there going to be an open mic

night in? We

were going to have you speak

friedberg, but we

really feel like you're not

capable. So we

want to be entertaining.

That's not personable, freed you

guys are missing out.

I'll tell you guys what makes my stand up comedy so good God, Here we go. Oh my God, we're back on this,

jesus christ. It's

my creative sensibility. So if I have some time to

prep and

write my script

and read

my own creative

insights, okay, bring

one joke next week for all the time we've spent together on this

podcast. You know, so little about me.

It's so, it's so

depressing, I gotta be honest.

Well, you know, here's the thing

About friendship. It's a two

Way Street. You got to open up a little bit. We gotta go out and get drunk one night. Let your winners ride rain man. I

just wanna give a

shout out to this guy. Andrew

lacey

shout out. He

is the ceo

of a company

called Pre Nouveau.

Can you just flash it on

the screen?

I went to pre new vote and what

they do is they do a head to toe

M. R. I scan

In 45 minutes

and they use a bunch of machine learning

and image recognition to

help

a radiologist interpret

these MRI's in real time beside you. It's a service that

you have to pay a few $1000 for. There's a location in Silicon Valley in Redwood city and a

couple of others and we mentioned

it. But the

reason I'm bringing this up is he

sent me an email yesterday and he said, I just want to thank you and the besties

for mentioning pre Nouveau because

we had a bunch of people

come

and he said

we found no

less than 11

lifesaving

diagnoses 11

11, 11

individual listening to the pod

pod saves lives went to pre

Nouveau after hearing about it. Had a head to toe M. R. I found, you know, all kinds of issues

from a brain tumor

and brain cancer too, stomach cancer and other things and

was able

to get the care that they

needed. Amazing. Anyways, I

just want to give a shout out to him for for doing a lot of really

important work and

for the folks that are listening that

have

some money set aside and can

afford to do this. I would just really encourage you.

We have no financial stake in it. Nothing other than we are users of it. But

check out www dot

com and shout out to Andrew and his team there. Okay,

Here we go. three

two, Let's start the show the war

in Ukraine has

him insane in the

membrane

and Biden's new

disinformation council

is going to have him

detained to calm him down from

tanking Selena. He started

smoking that marijuana.

You know him as the rain man. He's here

again. David sacks. How you

doing? Have a good week? Yeah,

not bad.

Alright. Uh big energy this week. Huh. Okay. In high school, he

had no friends but

thanks to the pod undergrads are in his D. M. S. All

forms of steak.

He's a purge in. He's the vanguard of all the virgins. The

queen of kin, wa

the Sultan of Science. David friedberg. Wait, I missed like half of that because

was laughing so

hard to do it again.

Do it again. Let me

try from the top

in

high school. He had no friends, but thanks to

the pod undergrads are in his D. M. S. All forms of steak. He's a purge in. He's the vanguard

of all the virgins.

The queen of

the Sultan of Science,

David.

Just

for the record. There's no

undergrads in my D. M.

S. But I appreciate

the All right, we'll

check.

Alright. Three to try

for free Fergus

tweets and the show hasn't started.

I think I'm taking over intros next week. Okay. He's gonna do

Jaeckel please. By all means

next week. You do. You're a

comedian who has a chance to

prepare in

advance and think your thoughts go ahead.

Big boy. Give me a week. You got

it. Okay, yours next week.

Let's see these latent stand up skills in action.

Yeah, absolutely.

He's been hiding them from

us. Yeah.

I don't know a lot of stand ups who hide their ability. You know the funny thing about hiding something and not

having something from the

outside and they look the

same.

Sorry, jake. I'll

go over to you. Okay. He's

dropping annual

letters in luxurious sweaters.

As

far as the sparks go. Well, it can only get better

dictator himself.

I cannot

I cannot comment on the

spot. Oh my God. I mean, this is getting brutal. Who's writing these? Oh my Lord. Alright. Everybody. It's been a big week.

Uh, Did you, did you read my

Annual Letter? Any of You? three Assholes? I

I saw, you know, that's

a that's a no, I get it. I get it. I reviewed the table where you listed all your results and I actually sent it to my team. I was like, this is a really nice way of summarizing, you know, affirms results over, you know,

a long period of time because you had every

fund and

your totals

and uh all in all the key metrics.

Well, can I talk about that for a second?

You know what's what's incredible about

what you're saying? Saxes I

I was

interested in a bunch of other funds that I'm invested

in and their returns.

And then I've

also seen a bunch of leaked

fundraising decks of all kinds of other

firms from growth stage to cross over

to PE. And

it's incredible

that they are not standardized,

right? Some people only show gross I. R.

R some people show net ir

are, some people don't

show the total value

of the paid in capital,

which means,

You know, if you have a 100

dollar fund, what is the total value

of all of its holdings?

Some people don't show

D. P. I. Which is

distributions have paid in capital, which means okay for every dollar you've

taken in, how many dollars have you sent

up? If you

don't show all of them? What was

shocking to me is how much you can kind

of

hide and

play and manipulate the

numbers. And

one of the most crazy things that I saw

is that there are these

late stage funds that right

into their fundraising

decks. That what

they actually use our lines of credit to juice I. R.

R.

So what they do is

if they're about to do a

deal, they'll actually

get a loan from a

bank.

Put that money into a company, wait

until it's about to get marked

up.

And then what they do

is they actually call that

original money from their

lPS and pay back

their capital called line of

credit. So what does it do? It

inflates? I. R.

R.

But this is why if you don't, if you see the other numbers,

it still shows that it's

kind of like, you know, not doing much of anything. So if you ever

see

multi 100%

IR Rs or

high huge IR Rs

With zero d. p. i.

And a marginal

tvP I it's folks that

are playing games

to trick LPS.

Just a heads up to. That is

so weird. So what you're saying

is just to summarize for people who don't

understand, hey, we

get judged on the rate of return

each year. So if the stock market does

seven or 8%, were expected

to do triple that. So

We gotta hit 20, each year. Now

the clock starts

ticking when

the money gets called from the LPS,

the partners

and gets put into the

company. So if

you invest in your tour of your fund,

you pull the money down from the

LPS, you put it into

Youtube, whatever it is. What you're saying is

they will take a loan

against that future money from

a bank at an absurdly

Low interest rate, let's say one

Percent or 2%. They make the YouTube investment. Then two years

later, Youtube has a

price round that marks it up

20 X. Then they put your cash in in year

three of the fine year

and pay

back the loan. Now they've paid two

Percent two years in a

row. But the thing has gone

up 20 x what? That's,

that's dirty.

Well, so it's, it's dirty

enough that the sec has actually now

introduced legislation. It was in

february

that basically is going to

try to uncover all of this nonsense. And so you'll have to be much more

transparent. So the

format that I used in my

opinion is the most transparent way of

not being able to hide the cheese, you

show all the critical

elements together in a

simple table that

will make it

very obvious who's playing games and who can actually make money.

So there is

a semi legitimate version

of the loan thing which is um,

you know, where this comes from is a capital call loan. So you know, we're making a bunch of investments throughout the quarter of $1 million dollars here for a

see deal 10

million for a series

a you know, it's happening

all the time. You don't actually want to hit your LPS with capital calls for every single little small investment. So what

we do is you get a capital call

line from SVB or something like that and then you do one capital call

call per quarter.

And so they will loan you the money

for, you know,

1, 23 months, but it's not for a year. But the, but the reality

is if you have a reasonably well

developed infrastructure, you have a cash forecast

of what deals you may or may not close with probabilities and so you know what the weighted

amount of capital you need to have on your balance sheet is. So I agree with you to have a small amount at the edges

to pay for expenses to pay for salaries

while you clean up at the end of the quarter

completely reasonable.

But if you're making,

you know, five

Or 10% commitments

into a company and you're

using this as a way

to basically

create subterfuge and

hide. I think that that should

not be allowed.

Yeah. Yeah. The number of capital calls is

annoying for people. Yeah. Yeah.

Anyway I did share you

that table with our team too because I did like the format quite a bit.

I think we'll start

reading it this weekend. It's very hard for funds who are not performing to use that format. Now. Yours you're you're you're very highly performance so you can use that format. But I don't think

people that have not

returned money or or have fake paper mark ups can use that format because it is too simple.

Yeah. Yeah. At the end of the day, what

metric

do we all look at when we are LPS

in a fund? Well, this is what I

put down, I put down the ones that I look at for everybody else that I'm an L. P N. You

know what one is that for

you? I

I I I

I need to look at the totality

of it. I need to

understand what

is your gross and your net

Ir ours. Those are

important things to understand

because it shows how efficiently you put the money

to work.

But then ultimately then the other two things that really matter is what is the total value

you've created and

then what percentage of that have you given back to

me because

that allows you to understand how much

paper value this

for for example, today,

let's just say

you had a fund

that had a T. V.

P. I. Total value of paid in capital of a five X. A five X. On a fund is incredible.

But if you've

distributed none of

that, well, guess what

if we're sitting here in

May of 20

23 or 2022 rather the total value of your paid in capital is not really

five x. It may

be only three X. And it may be actually 2.5 X. Considering what the markets have done to these companies. Right? And so it allows me to really understand how

performant funds

are in, not

just being

a part of the game,

but actually

generating realizations. And this is the hardest part, as I told you, Jason like this past quarter, I think I passed two X across my funds when I was managing outside

capital

And I think my gosh, it took me 11 years. It's hard to return to extra

money and that means

I've returned $2.5 billion.

You know how hard that

was. Yeah. I

mean you gotta time the exit, you have

to have the ability to, you

know, you can't even time the exit. You have to you have to be constantly managing and working your portfolio. Sometimes you're selling in secondary transactions.

Sometimes you're actually

trading up in private markets where you help this company merged with another

private company. Other

times, you know if I

think about it,

the number of I. P. O. S. I've had is relatively diminutive. So how do you make $2 billion where I've only had one I. P. O. Which has been slack. Yeah. So this is a

really really hard

business and it was just a reminder that, You know, in the last four or 5 years, managing capital has seemed relatively easy. But in these next few years you're going to see who's really, really good.

It's kind of like old warren

buffet. You know, you really, you know, you can see who's naked when the tide goes up. I mean

said another way, the

Last five years raising a fund has been

really easy. Uh

and writing checks has been really

easy and now

comes, you know, act

three which is returning

a multiple

on the money you

easily collected. And

boy, is that hard? And you know,

all of these,

um, new lps,

all these Lps send me

even, I'm not an LP

and a potential, they send potential

LPS, their

performance because they're so proud of it. Like

quarterly. I'm like

not even in this fund and they have these crazy

markups, crypto

investments, this whatever,

but they've returned no

capital. And

so just to give you, just to give you a sense

of it, if you, if you look

at the most fantastic organization in the world, if it were an investment manager which is Berkshire, Their long run 50 year track record is, you know around 20

right? Gross.

If you

look at the most successful

asset manager in the world and I would put Blackstone at that, just incredibly

good

and best in class in probably three enormous

parts of the worldwide

economy, real estate credit,

um, and private equity,

you know, their long run track record is that on 200 some odd billion dollars of private equity and another $100 billion of, of

um,

of real estate they've returned to X. So that's what the upper bound is. You know, doubling people's money and generating 15 to 20% is the best you can expect if you are really excellent and long lived, that's the best. What do you

look at Fribourg when you're an LP, what number

do you care about? Because you LP other funds

and I think all of us do at

times I made my first

Venture fund investment in 2006 and

I am still

getting

distributions from that

fund

And I'm looking at it, I'm like, this is a 2.4 x

over that period

of time. I'm like, what the hell? Why did I even put this money

into this fund? I

guess this makes sense for pension funds and, you know, very

large balance sheet,

long range investors

that need to kind of diversify. But as

an individual,

I

should have put my money and have

had liquidity on it for

16 years

rather than have it locked up in a bunch of private companies sloshing around and you know kind of dribble out and at the end of all this I only get 2.5 times my money back. Two and

a half times your money in 16 years. What's that? I. R. R. It's like low teens. Yeah not a great

deal. No not

slower. You would have been you would

Have been better owning the s. and p. five

100. That's right.

And so for me I think the key, the metric, the only metric

that matters which I think you're

saying timothy is how much cash I got out relative to cash

I put in.

And so initially my my I. R. Is negative 90

7%

and then it goes up to negative 80 and then negative 16 negative 30

and negative 20

And now it's 14

percent because I

finally got more money out

than I put in.

And so it doesn't

feel to me

like you know

the just

generally private investing, everyone gets excited because we all get sold stories and individuals all gets old

stories of you put a dollar

in, you get 100 bucks and I mean J. Kael

wrote a book called

how I made 100 million

bucks from

whatever you invested

in Uber. And

um and that story I think it's everyone kind of excited but the reality

is

the vast majority of the

time and if you

diversify your bets like this,

you're gonna end

up waiting a long

time to get your money back

you're gonna be locked up.

And a top performing

fund is returning

2.5 X after 15

years, which is not

much better than kind of investing in the S. And

P. Or you could sell that anytime you want

and use that cash for any purpose

you want.

Well, if you did $100,000

Investment and you returned two

160,000

in 15 years,

I'm on an ir

calculator right now.

Internal rate of return is 6.5

8%.

Um Yeah, I mean

and if you did QQ QQ depending on

yeah.

How hot the market was then.

Yeah, it's really,

it's really really really

hard to

actually make money.

There are always going to be

periods where people look like geniuses and have mark ups, but you can really see when people have skill after

a decade and a couple

of up and down cycles.

And with hedge funds by the way, right, hedge funds put up a score every year

and

in certain macro cycles that can last many, many years, everyone looks like they're doing

well.

And then all of a sudden tides go out and you lose more

than you made over

that period of time. And then you realize holy crap, I was actually in an insurance business where you get paid some small premium every year and then you have some massive loss one year and that massive loss, it turns out your underwriting wasn't good because you lose more than the sum of all of the premium you collected

over that period of time.

And unfortunately a lot of investing looks like this, which is, you have small returns for a long period of time and then some massive loss. And uh, and the whole business makes you look

like, you know, along

the way, a genius. But the reality is over any, any long cycle, most folks

end up kind of in a bad position. Um,

and then, you know, the

sec, by the way, has,

um,

has solved this for

mutual funds. Right? And E. T. S, you know, there's, there's very

strict,

there's very strict standard

reporting. And I do think that

as, um, you

know, for example, like if you go to the

big banks, sorry to interrupt, I just want to finish the last thought. If you go to the big banks

and

you have, if you're an individual, like a doctor or a dentist or somebody and

they will

aggregate and pool capital and put it into these funds

on your behalf as an

example. So, you know, it looks like Jpmorgan or Goldman. Sachs is a, you know, 50 or $100 million LP in one of these big funds. But in fact, it's just the sum of a bunch

of folks on their

platform. It stands to reason that if the sec can actually mandate standardized reporting for private investing, it would actually be a really good thing because all of these games will and probably currently are as far as I've seen in these presentations, tricking a lot of

folks to put

their hard earned money into things that actually will never make

money.

And it's because if you selectively cherry pick how you present this data, you can tell a partial truth. So,

you know, I would really, I would

love I'm happy to be compared to any

organization, but every time I

hear somebody chirping about how good they are, my only comment is I just want to see your table in the same format as my table and we can compare it because it allows me to really understand yeah, liquid returns.

And by the way, the point I made earlier

about um, when

markets are generally

good hedge

fund public market investors generally can look like they're doing well by having a good marginal return above the benchmark every year. And then one year have a big draw

down and suddenly they

realized that their underwriting

wasn't that good. The

same can be true

in in private

investing in the

opposite way in the sense

that you'll put in small

checks, small checks

and lose money and lose money and lose

money and then have one big

banger and you get a

100 expert turn and you look like a

genius because your whole portfolio looks good, but you fast

Forward and you keep doing that for another 10 years. All those,

small checks may

not even add up to the

Bangor and

that's um that's the flip

reality that you realize. And by the way, I

think that's a good analogy for

the difference between public and

private investing. You

have similar cashflow economics or you can have

small returns and then a big

loss in public and you can

have

small losses and then a big return

in private. And the

timing of when you present

your data can make

anyone look good if you catch a good

hit at the right time or you

don't have a bad hit at the

wrong time.

And then the framing over

a long enough period of

time, I think really

becomes the key measure.

And the reality is most people don't make it

long enough in their career

to actually to actually present true

results in how they

really do underwrite, and by

the way, to the extent anybody's

listening is able to invest in these private funds. I think Jason

mentioned this uh

superficially, so let me just dig into it because I think it's really, really thoughtful

what he

said, which you should understand

if you have

the option to invest in a private fund, you have to understand that that private fund has

two huge

Negative things working against it relative to investing in the S&P five

100. So

you could put your money into a vanguard E. T. F. Or if you could put your money into a private fund, you need to realise two things. Number

one is it is

illiquid, not just for 10 years, but it could be a liquid for 12 or 14 or in, you know um

Fred Brooks case 16

years. So you need to get paid a premium for owning that. And then the second is depending on the business

model, you may have

very high failure rates,

which means

that you need to really hit these outsized grand slam home runs. And if you don't then you're going to be worse off than if you had invested in the s. p. 500. So that deserves a premium. And so Jason's right. Which is

the S. And

P. is between seven and 8% over long periods of time predictable compounding.

That's

You have to add another 7-8% for this illiquidity

premium

And another 7-8% for the business model

viability of for

example, being adventure. When you add those three things together, you do need to get paid basically in the

low to mid

twenties returns to be justified? Otherwise you are much better off just owning the S.

And p.

Much much much better off sex. Do

you what do you

look for when you're L.

P. Ng. And now that

you have many large funds,

What

do you think LPS are looking for now. And what do you advise them to stay

focused on

The # one metric that matters is

D. P. I.

Which is the ratio of distributions to paid in

capital. And it's basically

money in versus money out right at the end of the day, that's all that matters is how much money did you put in the fund? How much money did you get out? The issue is that to Thomas Point, these are 10 to 12 year funds

and it takes

a long time to get distributions. So all the other metrics are basically triangulation. Czar approximations of what you think the funds going to do until you actually get to distributions. So I would say in the long term it's all D. P. I. In the short term,

you look at T. V.

P. I. The total value to paid in capital.

So it's basically, what's the

marked up value of all the positions in the portfolio versus how much cash has gone in? And then the big question is, does the T. V I T V. P. I turn into

DP I

have to explain that

to people if thomas

had invested

in

slack, but there hadn't been an

outcome. It could be on

the books for a billion dollar

position. So the T.

V. P. I is

looking really great.

But until that

company goes public and the shares are distributed, you know, the

LPS haven't realized

it. So it's

it could be ephemeral

or it could go down significantly

as we've seen with public markets. Yeah.

So in the

Last four months we

just returned

our fund one in terms of like real distribution. So I think we have like a DP I have like 1.11 point two on that fund. Now the T. V. P. I. Is like 4 to 5. So but it feels great just to distribute the entire fund out literally in my

1st 2 funds. I think

we did that as well and it's a really great feeling

and

you know, sometimes

You know selling 10

or 20% of a

position

early and getting over

that hurdle

and just getting into

The 1 - two x. That's a pretty great feeling

by the way, just to talk

about how difficult it is to convert

paper

gains into real gains.

Let's just say

Jason, in your example, you had a fund that had these huge paper gains but haven't distributed anything as coming into this year. Okay, here's

a little interesting

data about the ultimate buyer of all of these text talks, which is the NASDAQ, right? People that buy stocks in the NASDAQ listen to this as of

yesterday,

More than 45% of stocks on the NASDAQ Are now down 50%.

So basically

one and two, More than 22% of stocks on the NASDAQ are down

70

5%. So almost one in four and more than one in five

and

Then more than 5% of stocks. So one in 20 On the NASDAQ are down 90

percent. So

you can use this to actually get a blended average. But

what it means is that

the ultimate buyers of tech stocks

are taking a 60

percent discount

to what they

were able to buy even just four months ago,

60

percent. So there is

no public

mark

that will

Support a private mark unless it's also discounted by at least 60 now. Think about that when you talk about this entire panoply of companies

that have

been over funded,

many who

are under executing and burning enormous amounts of money, who now have to come back out to the market

as any

sophisticated buyer will have to tell them the truth, which is, I'm sorry guys, but the

data says there's

A 60% discount to

this mark. Are you willing to

accept it or not otherwise? The

lights are gonna go off and these marks

only happen

uh, at

least in the private markets and

venture funds

when a transaction occurs. So

if somebody raised a bunch of money as we talked about in previous episodes at a billion

dollars, You know, uh and they're now worth five

100 million. That's only gonna work itself out in

fun documents and

reports for

a year or two later when the next transaction occurs

so that

there is a lagging

effect

one day, I just want to bring up before

we go into,

um, maybe

GDP or the bill.

Uh, wind situation is what

we talked about

on this path last

year about what

was gonna happen in private

markets. I've

Been seeing the last two or 3 weeks and I don't know, sacks

and Freeburg what

you're seeing in private markets, but really

acutely

people who are going out and skipping

rounds, just like,

I'm gonna, you know,

just skip my seed around and just do a series A

I don't have product market fit. I'm gonna get

credit for work

that hasn't been done. I'm

Gonna raise 10 million

without product market

fit. Oh my Lord! Has

this, uh,

that has the dialogue

changed? I've been on

many calls with founders who

have met with 50

Vcs and

the conversations are

moving to, you know, how many months to

break even and

uh, you know, how many customers you have and how they increase. And let's talk

about the turn, it is getting,

uh,

super pragmatic out there if you're

a founder and we, we said this a year ago,

but it's worth stating here,

this is not the moment I

would try to over optimize

if you have a

term sheet or money on the

table. I would,

I would close it

just, you know, founder to founder. What are you seeing

sacks? Yeah, I mean, it's, it's gotten a lot harder, I think, especially the growth rounds, we actually have signed to growth term

sheets recently

and it was much harder for us to do growth rounds last year just because you had these huge mega funds come in at crazy valuations but now they're kind of licking their wounds and we're starting to see some really attractive growth opportunities. Everyone else has backed off. So it's interesting.

Yeah, it's changed quickly.

Yeah. Now 1 1 thing to you know, parents raised a good point about you know private not only our private valuations sort of sticky but private

marks are

sticky. And you know, companies only get

remarked every couple of years.

And so whereas the public markets get remarked every

day. So

it is hard to

know like what is the

proper valuation of

a company that

raised money last year

because

yes

valuation multiples have

come way down but then

also they may have grown and their performance is better.

So the

analysis that I saw Jason Lemkin do in his

LP newsletter

and we're

basically repeating it for our entire

portfolio is to calculate what was the R. R. Multiple that you paid basically evaluation divided by R. R. What was that entry

multiple and what is

it today? And so we're doing

that across the whole portfolio. So what

you see is

sorry sorry, socks

clarification, L. T. M. Air or you know

uh NTM

Air or which

one basically

You last 12 months next 12 months.

You know you just look

at their current error which is you know, run rate their current run rate revenue. Yeah.

Take

January you times it by 12? Yeah, basically

yes. You take the current month

Multiplied by 12 but they

have to be annual

commitments. Right? So if

it's not it has to be annually

recurring revenue. If they're not and if it's not an annual commitment

with an

expectation that's recurring, you can't count it. So for example, you don't

count professional services revenue

in that in

any event.

So the point is you you

basically calculate

what was the

multiple that you

paid at?

You know, entry in the

company and what is it today

as a

function of the current valuation?

And

what we see is, yeah,

there's a lot of companies that we got into,

I don't know, two years ago at evaluation

multiple that you couldn't

defend today

60 times eight times 100 times. But the multiple

today

Is more like 10 or 20 times because it's actually growing really fast.

So you need to look at both

sides of the equation and that's the analysis

were running for every company in our

portfolio and then you know, LPS can decide how to how to market.

I mean

the most important

thing is what's the next

investor if they need more

capital going to market at? Well the question is are you

growing faster than valuation multiples are

falling, correct. And then can you,

that means you

could have a down round a neutral round or possibly an up round. But it doesn't.

So are you starting to

see people or

people discussing on

the board level or in your firm?

Hey maybe we take

a sideways

around a neutral ground.

We just go to last year's price and top off another 10 million. Are you seeing

that? I've told some of the boards I'm on. Just keep fundraising. Just keep the round

open top off if

there's money available

because you know

especially if you

raised around eight

Months ago, six months ago.

Those

prices like if people are

still willing to invest in those

terms that's a good deal.

I literally had this conversation with the founder this week

where they

had raised that in a great valuation and

they turned money away

because they

were like

we're

still growing so

why would we take the money

now if our valuation

Is going to be you know double in nine months

and now it looks like yeah

Maybe you know that extra $125 million dollars would have been good to lock

up. Okay so

adding to these headwinds,

I think we um

we've been talking about the

possibility of a recession for those uh new to

the to the concept of a recession if you're

Under the age of 30 and

haven't really lived through one as an

adult. It's too

quarters the official

Defined 2/4 of negative growth of the GDP.

Well it turns out

Us GDP fell 1.4% in Q

one.

Uh and Q four, we had a 6.9% growth rate. Q one was the weakest since the spring of 2020 when Covid hit nick que the clip

word sacks. And

I basically said this may happen in january of this year.

So the

concern is that, you know, with the losses were seeing and I mean every day it just keeps like you've seen more read that this could turn into a recession. You know, popping of bubbles is usually followed by uh by recessions are so I think, you know, the fortunes of the economy could turn really quickly here and that is that is the marginal risk. The marginal risk is actually for a recession. David is saying something really important. The risk in my opinion is not of runaway inflation anymore. The Fed is now in this really delicate situation where china cut rates. Last week, we have an FOMC meeting the Open markets Committee that sets rates on Wednesday, I think of this coming week. What is he supposed to do? The risk is to a recession because if we

overcorrect

and the leading indicators all around the world tell us that their economies are weak, then inflation may have actually been much more

transitory than we thought.

And right now we have to decide because if we overcorrect, we're going to plunge the United States economy

into a

recession. There's a lot of

data here and obviously this is

when this data

is always in the review mirror.

So obviously we're talking about Q

one. It takes a while to collect this data

and there's a lot of different factors going on

at the same time. Obviously Covid

and obviously supply

chains, consumer

spending rose at a

2.7

annual rate in Q

one, a slight acceleration

from Q four. There was also a nine

2% rise in business spending. So

we have a lot of spending

going on, Who knows if that is spending that actually occurred

in the previous quarters.

And because of supply

chains, like people's cars

are being delivered to people's machines

and manufacturing

equipment is being

delivered. Now we had negative

GDP in Q one

for

a whole host of reasons that can effectively be summarized by the fact that we are still trying to

restart

an economy at the tail end of a pandemic and we're doing it in fits and starts and so we

have these small bursts

of incredible GDP which we had

last year and then contractions

in the economy.

The thing

that's always been true about the United States is that we are a consumer

driven economic

engine, which

means that as long as people

feel confident

and they're buying things,

the economy tends to do well and we tend to move forward as a society

when consumer confidence ebbs

and people contract, they're spending, we are in a world of hurt the last couple of years, we've

had a lot of

consumer savings, right? We've had a lot of money that's been pent up in the system, whether it's stimulus checks or you know, loan forgiveness

or all of this stuff

has allowed people to

feel much richer and

as a result they started to spend in dribs and

drabs. The problem now

is that because prices are so high, all of those savings have largely been depleted. I just sent you guys

a a text

in the group chat of what consumer spending looks like in consumer savings rather.

And it

tells a really, really scary story, which is that the savings boom is largely

over. Personal savings

Rate fell to six

2% in March, the

lowest since 20

13. And so

what does that mean? Well, it means that the setup is there for um us

to sort of really

contract what we are able to spend as a society.

So I think now the

odds even

push further in

this direction

that we could have more

quarters of

negative GDP.

And all of a

Height we're back to what we talked about before, which is a 2019 like scenario where

the government or the feds specifically

races forward to tackle inflation.

And in 2018

and 19, it turned out

to be a head fake.

And by the way,

In 2019, the stock market ended up

More than 30% up, 32

percent or something like that

crazy numbers Here. And by the way back then in 20

19

china turned

over, it looked like

it was going to be a fast moving economic recovery for china and instead

they, they sort of

slowed down. We have the same thing here,

we have a

quarter of negative GDP,

we have china

in lockdowns. We have every company that's, that's in the manufacturing supply chain ecosystem telling

the world

that we don't really know what this is going to look like. Intel today

actually said there's going to be

Shortages and Chips through 2024.

So I think,

I think it could be a very difficult

path ahead for the

Fed. How do you raise

rates,

400 basis points into,

into a slowing economy, you could raise basis points

75, you know,

75 Dips, maybe 100 VIPs, but it gives

them very little freedom to operate without really

tanking the economy. There's

also another point

to highlight here which is um,

in some of this

data that was released, um

there was a strong

indication that there are

real issues right

now with inventories.

I don't know if you guys have tried

to

buy an appliance or a car lately um, or

a piece of furniture, but

Like I tried in the Q4 to buy

a car and it was

absurd. I mean right

now there's like one year delays to get a freaking couch. I mean

like everything in the,

in the global supply

chain somewhat

related to the

kind of big inflationary

pressure that hit us at the end of last year and then everyone placed orders. All the factories kind of have to produce a lot. They all couldn't keep

up through to what's going

on in china right now where there's lockdowns and factories are shut down.

I

have several businesses

in the hardware space

that are actively searching and

frantically trying to find components,

suppliers,

specific

parts, Even basic raw

materials like aluminum

are very hard to get ahold

of.

Um, and so there's also a very

challenging inventory and supply chain problem

when that happens, I can't actually

wire money and buy aluminum

because I'm waiting

for aluminum to show up.

I can't

wire and by the

microchips I want, I can't wire

money to my car dealership and buy money.

So that doesn't get

credited on the GDP counter

because those sales didn't close

that quarter. And as we saw with amazon recently and others

and apples just

said that they're expecting,

I think close to a $10 billion dollar hit this quarter

because of supply

chain issues, a

lot of folks

want to spend the spending interest is there, the

capital flows are

there. It's just that the supply

chain is clogged up and

we're so dependent on getting atoms

and molecules moved

around and they're all kind of held

up in different

places that folks simply can't get their purchases

in. And so the

revenue triggers don't

get hit. And so

the numbers don't look good from a growth

perspective, but it

doesn't necessarily mean that the

demand isn't there?

This is a significant

inventory problem

and supply chain problem

that's, that's driving a lot

of this, um, this adversity right now in the market

seems

and interestingly, by

the way, that doesn't, that doesn't mean sorry, that doesn't mean that we're not gonna have a recession

because you know, when I, when

I'm not able to spend money on apple, apple, spending less on their suppliers

and they're spending less on their suppliers. So

there is a trickling

effect of capital flows

and, and the recessionary

effect maybe hit, but you

know, there is capital and there is

demand for consumption.

It's just

that, that were really clogged up right now. Well and

the consumer

confidence index

has been on a bit of a roller coaster. We were at 130 before the

pandemic

For the year of the pandemic. We were down in the high 80's 87, 88, 80

nine,

we rocketed back

Up, um, you know, in 2021, people started to feel like, oh, we've got these vaccines, things are gonna go back to normal

Rocket back up to one

128

and it's been a slow tick

Down to where we are now at 107. And so

I think consumers don't

know what to think, they don't know if, you

know inflation is transitory,

They don't know if gas is going to be $7 or $4.00.

They don't know if they

should spend a big

spend on a big

vacation or not. And so this

I think in terms

of people's

planning, I don't

know if people can plan

how their own personal

budgets, right? And I think that's on the confidence thing to traumatize point.

We need to have a

predictable economy and

you know, it it can't be

this um

schizophrenic

to use the term

sacks. What what do you what do you think

about what we're seeing here in terms of,

we're obviously

either in a recession or

did you know, dancing

around it were basically you know on the edge of the cliff right now, I think it's probably the most accurate I tweeted in

february, hey anyone noticed that we've just entered a recession and I got dunked on by all the professional economists and you know, all these people, but

exactly correct.

And now it's like the data just came out negative 1.5% economic growth in Q1. So what I wrote at the time was exactly right

and you

know, I don't know how the thread the fed threads, this needle, I mean we've got a slowing economy with negative GDP growth, you've got inflation is

still

rampant. Um It's not as, I don't think it's gonna be as high as last year just because we're lapping a much bigger number from last year. So on a year over year basis, the comps are, you know, you start at a higher price level but inflation is still

there. So

you know, I don't know what you do about that. Um It's

it's a really tough situation

and when you have this kind of wealth destruction in the stock market, I

mean you

know, and we there was a

good tweet

that um mammoth you share, but you put up on the screen, I mean so much like wealth has been destroyed.

You don't necessarily see it if

you just look at the big cap indices,

but you

look at all the engines of sort of growth and prosperity, the small caps, the recent ipos the growth stocks, they've been absolutely hammered. It really hasn't been this bad since

the dot

Com crash of two

1000 like and and

not just the like april period, but like all the way in october where it kept going

and then

The 2000

Yeah, the 2000

eight real estate crash, so

we're already

like top three

worst

Situations for growth stocks in the last 20 years. And when you have that kind of like wealth destruction, it eventually trickles down into the economy because people just feel,

you know, companies

start cutting budgets, people have less

money and just feel the

spending goes down that dynamic that that we're referring

to in this tweet and that image is

called dispersion, which means,

you know, people may

be confused

when you hear why

are all these stocks down so much? But the the indices

are not down as much. And it's

exactly for the reason

that David just said,

which is that underneath the surface,

the mega

cap text consume so much of the market cap of these indices. So you know the googles the Microsoft the apples and the Tesla.

Those

Four just clog up an enormous percentage. I think it's approaching 40% of these of these indices. And so underneath the surface you have dispersion which means you have

These tale of two

kinds of stocks. You have these four

big mega caps

and then you have everybody else.

And the mega

caps are generating so much cash

that they're just basically

keeping the market afloat. So at this point maybe there's a small silver lining

and that silver

lining is that to be bearish right now

is

effectively not being bearish these growth

stocks because as we said,

they've been just decimated

at this point

To be bearish. The indices means very specifically to be bearish those four

names.

And only those four names. And so that may actually mean that the market is effectively

crashed already. Yeah, but

by the way, I'm not necessarily bearish on growth stocks from here because like you said, they've already been beat up so badly. The stock market is usually a leading

indicator. What I'm a, what

I'm a bearish about is just the state of the

economy because the stock markets traded

down, it trades down

expectations. So

it was already trading down

months ahead of the slowdown

in the real

economy. So now knew

in december the

market new in november, the recession was coming

and like around November six of last

year. And they knew it was coming in market new when we

talked about the sales that Bezos

and musk did the, you know,

when we sold, when

we sold equities, we were saying like, it's like, you

can't

keep all of your money

on the table all the time,

unless you have the duration of the wherewithal meaning you're just not time bounded and

you can just be there forever

and not everybody's in that

position and endowment could be in that position,

but individuals with no, an endowment is not because they have to create distributions every year,

right. They have to talk about the mega endowments where they, you know, for

sure, you know, you know, ford

or Harvard may not need to do this, but

smaller ones might actually

be operating, you know, memorial Sloan Kettering might actually be operating their

budget from it. Yeah, but just to go back to David's

point, like, it's a really difficult spot. Like

what is the Fed's supposed to

Do? So they're probably going to tighten 50 basis

points in May that's

relatively well expected will be, will be able to digest that

reasonably well.

But what did they say to David's point?

You know, if they all of a sudden

go on a

crazy program

of quantitative tightening,

right? And what is that again?

That's when, you know, we were spend, they were spending, they were printing,

you know,

money billions

and billions of dollars going into the market,

buying

securities and giving people

the money, right? That's

called quantitative

easing. Now

we're doing the opposite

right, where

they're selling and they want the money back.

Now, the problem is what that does is that

removes liquidity from the market. And

when you remove

liquidity from the market,

you actually

make it a little bit more fragile, a little bit more precarious,

a little bit more

price sensitive. And

so it puts

us in a very tough situation

when

the economy is slowing when these guys may be raising

rates and then at the same time removing

money from the system,

it may

be a lot for all of us to handle. And so I think that they're under a really difficult,

well, there is a business

cycle and, you know, there

are always recess recessions

periodically every 7-10 years. But they have really magnified this because you had the

Fed for years

maintaining interest rates really too low

and doing quantitative easing during a boom. And then the federal government was printing trillions and trillions of dollars and they didn't stop. It was one thing to do it during that sort of covid recession, but then

last year they printed that last

two trillion and that's what set off this wave of

inflation. So, you know,

when I was like in school, learning about economics and they would tell us that all these government

programs and actions are

like automatic

stabilizers or what have

you like, the government helps

balance out

the business cycle.

No, the government like magnifies the business cycle. They've made this so much worse. Well, they're putting their hands on the steering wheel, right? It's like let

the economy drive, let the

free market do this. And if you

start, you

know, you might oversee our into the federal

government is great at setting incentives, right? And creating like tax credit

programs and incentives for

private enterprise to invest money. But when they act as a direct market participant and start to actually

direct capital flows and make

decisions about how the capital

market should work,

it never ends well,

because this is not what they're good at.

Well, I think there's also

another, I mean, just

to counter that

there's, there's also this other issue of not just incentives, but when they create a free capital

that then allows

a market to find a way to take advantage

of that free capital

and that's effectively

what we've seen happen with

Medicare,

Medicaid as well as with the

student loan program.

And um, you know,

I, I don't know if we're gonna get

to the student loan program today. But I think,

you know, to your point came off,

one of the things that's happened

with the cost of education

in this country is

that the federal program,

which was, you know, and I took a bunch of

notes here to talk about this today,

but the federal government began guaranteeing

Student Loans in 1965.

It's called the federal family

Education loan program.

And that program

made capital

available

for

students to borrow to

spend on universities

or

whatever education

they want to go

get some of

their own choice.

And the idea being

that that will give them the ability to go make more income and extend their careers and and educate the workforce.

And the problem is that when

that capital was made available, a

lot of private universities

started to emerge and private for profit colleges started to emerge.

And in the

years since that, that program was introduced, I just

want to give you guys some crazy

statistics.

So in 19 1969

70 era, the

Cost for a public four Year college was 12

100 bucks a year. That's room board tuition and fees. And in 2020

that

Cost rose to 21

$1000.

And here's the,

the, the

Other crazy stat for private for your college in 1970 2500 a year, 2019 20

2046

$1,000 a year. And

so that capital basically

allowed these for

profit

organizations of these

organizations that trying to grow

their endowments, which are

effectively like for profits

to charge any price they

wanted. And

the consumer, the student would be able to get free

capital to

fund that quote unquote education

because it

was available to them for free

from the federal government.

And so the federal government

created a bubble in

education costs and that bubble in education cost

has now

overburdened 15%

of american

adults with student loans

that many of which would, they would never be able to pay back. And now we're in this

really awkward situation

of saying, hey,

maybe we should forgive those

loans because it's unfair that people are burdened

by this.

And um, and

doing so obviously doesn't solve the fundamental problem

which is that making

those loans available in the first

place creates an inflationary

bubble effect in the end asset and the end asset in this

case is education.

But we've seen the same thing with housing and we've

seen the same thing with pharmaceutical

drugs and medical care

and other services. So

any place where

the federal government steps

in and says, I will provide a

backstop, I will provide free

capital to support and create a quote unquote incentive

for this market to

accelerate. You end

up with these inflationary

bubbles, you're going to have people game the system

right? You get whatever university of phoenix types and and

even the

large

universities

raising

tuition to observe

things And people take

these loans to

moth before

their frontal lobes are even fully developed and they have long term

understanding of the ramifications of this. So

where do you stand on Mr mafia?

So there's

a there's an interesting article in the atlantic about who really wins

when you

forgive student loan debt and I and I just pulled out some facts so I'm just gonna look down

here and read them just so I get them right.

It said in the article

13

percent of the US population carries federal student loan debt.

Grad

Students account for 37% of that

federal student

Loan dollars. Currently it's 1.6 trillion of total

total student

debt vs about 10 trillion of mortgage debt.

So the average

Debt has gone from about 20

5K. 2000

12-37 K. and 2022. So you know, almost a 50

increase in a decade.

The majority of student debt is held by white

borrowers. Only 20

3% of black Americans aged 24 or greater have a college

Degree in 2019. So the majority

of the black population would not be directly benefited by student loan

forgiveness.

In 2020

the median weekly earnings for someone

without a high school

diploma was six

$119

for those

with some college, but no

degree. That

Number was $877

for those with

A bachelor's degree. It was 1,305

dollars. And that number

continues to grow for masters

and professional degrees.

And, and phds, interestingly, the

Last two points. The

gallup organization who ran a

poll is unable quote

to report the percentage of americans who have mentioned student debt or student debt cancelation

because it hasn't

garnered enough mentions to do so. In 2022,

according to the article.

Across four gallup polls quote just one respondent mentioned student debt as the

most important problem

facing the nation unquote.

And then last

Thing is here is that 43

of

The 2020 biden

electorate graduated

from a four year college or

university versus

36% of

Democrats in 2012. So, you know, one of the takeaways is

that this

may be an issue that affects a certain

percentage of the dems who went to

college, but it may

not represent a plurality of

all democrats and it

doesn't really represent, you know, a majority of all sure are vocal though, to your

point, I think,

yeah, I mean, look, this

is why I think

That there are two motivations,

political motivations for doing this now. They're they're pretty obvious.

Um and then

I just want to say three things on, on kind of the concern about this and why I feel very strongly

that if we don't fix the underlying system.

You

cannot forgive student

loans, you have to fix the system before. Forgiving student at first, what's the number one fixed freedom. Well,

So, so let me just say the two

motivations, the two

motivations, Number one, this is a stimulus. So this morning the biden

administration said

that they were thinking about taking

executive action to make the

1st $10,000

of student loans forgiven. So if you do the math across 43 million people, that's a roughly half trillion dollar

forgiveness.

What happens that

$1 trillion, much like we saw last year becomes

a stimulus payment?

It is money that people now have

that they didn't have before. It is capital

that they or freedom from debt

that they didn't have before

and it will stimulate

the economy.

So there is a very

important

economic incentive here to do this,

which is if we do it, it will

be stimulating to the economy and people

will spend more

and the economy will

grow by the way, that's

a, that's a 2.5

percent boost to GDP.

Right? So half a trillion dollars of free money just flushes into

the system. The

2nd thing is that it will

help in the midterms is their point of view,

right? So they've obviously done, they've done the polling here, right? And, and it's like, hey, when I was in junior high, the kid that ran for class president was like, I'm gonna make everything in a vending machine free,

guess what that kid got voted in. So

you know the idea that you're just gonna give everyone free, give your your loans back to you for free. Everyone's like, my gosh, this is the best thing ever. Elizabeth Warren, you're a genius. You know, Bernie Sanders, your genius, joe biden your genius, Let's say yes. Um, and so they believe through polling that this is going to help help them

in the midterms.

Um, but the challenges, if we don't solve the problem, if there's no standard of

value

of an education, if there's no standard around whether or not a specific accredited university increases your income and earning potential as an individual or increases the opportunity for you as an individual, you are wasting money, You're giving federal dollars to private companies who are profiteering from that and the individuals are not going to benefit from

it. And I think

that, that we're seeing this, sorry, and we're seeing the structurally continue in a lot of other places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant to benefit the individuals that is being funded for the individuals are not getting a good education. In many cases, they're not earning more by getting this education tomatoes, data speaks to the average, but a large percentage of people go to crappy universities that don't improve their earnings potential and then the federal government says, here's this free money that private university just made a bunch of money and no one is better off. And guess whose end up paying for taxpayers are gonna end up paying that private company a bunch of money because we're going to forgive all the loans. And so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university proved that it improves the potential. And by the way, if you stop the federal student loan program

today,

fewer people would go to college and fewer people went to college. Guess what would happen? Colleges would drop their tuition, the reason they're able to supply and demand and the reason they're able to raise their tuition because there's so much demand because there's free money. And so if we actually saw the federal loan program cut back

or put these

standards in place, the cost of tuition would actually decline and profiteering would decline, People would get a better education and

the taxpayers would be better off

end of diatribe. Sorry. No,

no, it's, I think it's completely

legitimate sacks. We talked

on a previous episode about how people make things like

immigration, uh, you

know, such a charge.

Philosophical debate

when there are point based systems being

used in Canada Australia

and other places that make it much more

logical. Do

you think the solution here is to free burgers? Point of

just, and I'm interpreting free

Brooke's point as what

is the value of this degree. Nursing great nurses can take out 100% of their loans because we know there's

a nursing shortage.

Uh you know, philosophy

graduate students

Maybe can't take out more than $5,000 in debt because we

don't see a bunch of

job openings for that. Getting a history degree trump university is a lot different

than getting a nursing degree.

So sacks. What's the

solution here. Uh and then

we'll let give you

your your

swing at bat

in terms of buying

votes. Yeah.

Look, I think that

alone only makes

sense when

it generates

ry right? It

makes your going to generate more

income on the other side of that

loan to make that loan

worthwhile. And the

problem here in too

many cases is these kids go to these schools, they spent five years there, they get a

degree

in some woke

nonsense and of course it doesn't help their

earnings power. I mean that's that's the fundamental issue here. Is that these degrees are worthless, right? I mean if you go, if you go to, if you go to college to get

you know, to become a

doctor or maybe

a computer program or

something where the skills

have value,

then of course you can pay back the loan because you get

a

gainful job

but you know,

otherwise if you just

major in fine arts at Harvard or

something like that. I mean

you basically graduate, you get a job

at what the new york times

is your dream. You can't pay back your loans, you're saddled with this enormous debt and think

about the cultural impact that has.

You have this young generation who believes in socialism

and I think this is a big part of the reason

why is they have no

capital and they have no

ability to accumulate capital because they're so saddled with debt. So to interpret what you said sex, hard to believe in

capitalism if you've

got no capital, right. If you start, if you start the

Race at -200

$50,000 in

debt to get a degree that

was basically worthless for you.

Look,

I think

maybe what we do is we reform

the debt.

I had actually okay with forgiving the debt in some instances if you got a reform

of the system, in other words, if

we stop funding these worthless degrees,

but if

you're basically going to acknowledge that, hey, we need debt forgiveness because these degrees are worthless. Why would you keep

funding those degrees? So

you know, we need to have like a more

honest, comprehensive

solution here.

The other thing we should do actually

is one

really crazy part of

bankruptcy law is that student debt

is one of the only types of debt that's not

dischargeable in bankruptcy. I

don't know if you guys know that, but

under George W Bush's presidency. Yeah, basically look, when, when, if, if you ever get to the point

where you have too much debt

and you can never pay it back, You

declare bankruptcy

and then the

court starts you over from zero. So you can at least

start building some wealth right? Exactly. No

one's going to want to give you credit after that. But at least

you're not so deep in

the hole, you can never recover. So that's the point of of a personal bankruptcy.

But the crazy thing

is that in bankruptcy you cannot get your

college

det, your student debt

canceled. You can get

your credit

card debt canceled, You can get other types of debt cancer. You can't

get your student

loans canceled. It's crazy. So

that's one thing they should fix

immediately is

it was private

market Sachs, you

wouldn't need to do that. Right. The reason that's the case is

because it's federal dollars that

are funding those loans.

But if it was private market dollars, people actually, if banks and

lenders took a loss

when people couldn't pay back the

loans, then the market

would work itself out. The problem is that the federal

government stepping in and trying to be

a market maker rite

and it creates this, this totally crazy incentive.

Right? It creates, it creates

double distortions. On the

one hand, like you said, it

basically means

that because governments money

is funding everything the

tuition goes up because colleges

take advantage of it.

But then also nobody

is really making a

smart ry

decision about whether

a smart underwriting

decision about

whether this loan is worth making, whether it

actually stands

a reasonable shot at

being paid back.

There is such an easy free market solution here. It's called an I. S. A. Stands

for income sharing agreement. This is where

you give a loan

to somebody and

you get a percentage of

their income

over a period of time capped at a

certain multiple

say two X.

And what

this does is

it aligns the person giving the

loan with the

job that's expected to come from the education. You already have that. You already have

that. It's called taxes. Yeah but here's the problem. Nobody's watching

the store. So nobody's looking

at it saying I will give an I. S. A. At

this percentage return for nursing nursing. I gotta

pay 50% of my income every year to the federal government, the

government like I pay taxes. The thing we have to remember

is like if the federal

government tries to do this, it really is just about buying votes going into a midterm election. And here's why if you

arbitrarily

give a bailout of

one sliver of

the population unless that sliver

is really really large.

Which we know it is not,

it's going to really

anger everybody else. Think of all the people

that are tradespeople, Working class people who don't

have a college degree.

What are they going to think?

What about all the people

that just finished

paying off their debt? What are

they going to think? It's going to upset so

many people and ultimately what this is, is a bunch of coastal elites who are miscast

in jobs and

saddled with debt is pushing pro for a program

that isn't a broad based mechanism

to create a quality at all. It's just to get out of jail

free card for a small

people or a

small group of people who unfortunately

were taken

advantage of and this is the thing that we're not

losing sight, we're losing sight of, you can only pay

back a loan

if you're making more

money than you. Oh and the fact that

this exists shows that these loans

were really

poorly constructed

and they were given in instances where they should not

have been in the private

markets, we have

seen that happen, but we go through

a cleansing mechanism to sort

it out.

That's literally

What happened during the two

1008 real estate bubble. People

gave mortgages to

people who could not

exactly identify as

a lender. Think that you're not going to be able to pay back the loan.

I don't

give you the loan.

That's the

simple mechanism that exists

in free markets. And

part of the issue is

a lot of people got

loans thinking without doing the calculation, will I ever be able to

pay this back and they

took the loan to get an education culinary concept that I will just make money. But let me ask one other question of you guys at what age

and at

what level do you think individuals should take responsibility for the decisions

that they're making when

they take on personal debt? Because we see ourselves getting in the cycle where consumers are given debt. They don't think

about

the consequences of that debt down the road or do the analysis themselves and maybe

they're not equipped to

and they'll take out a loan on a car on a house.

But the problem is

education. But but

here's the thing like education is a very dangerous thing

because we put

so much societal credit and external signaling to it

and we give everyone

effectively the same quantum

of risk. But that's not true for a

credit card nor is it true for a car loan.

So the private

markets are efficient in that when you first try to get a

credit card, sure

You don't get an amex centurion or platinum card, you're given a chase sapphire card with a $500

limit and you

earned the right to borrow

more. Same if you

applied for a car loan, the same with a mortgage,

it's based on a down payment. So

there's differential risk

pricing

and if you don't have differential

risk pricing,

you're getting a lot of people, how

would you edit education? The market would figure it

out. The market would because you would differential price

the risk as you

can literally a brainstorm. But right

now like what are your grades,

what courses did you take? Whatever, whatever

it is, skills were not going to

get it right. The market will get it

right, but the market

would figure it

out. The problem is and

and and sorry, the incentive was, and this is a really important

point. You know, if you guys

read Ray Dalio's book, which we've talked about a number of times, he's identified and highlighted that a growing

economy and a

successful um country

improves

by improving education and having more people

get higher education,

generally speaking. And so the initial incentive, the initial intention

behind the

federal student loan program

was a good one, which was to give people access to capital that the private markets

we're not providing at the

time so that they could go out and get a higher education, We could improve the education of our

workforce and

we could grow our economy Nowadays. The question that we always forget, remember we always get one

Step away and then two

Steps away and five steps away and we missed the point.

We're in that moment now where

the question really is,

is the federal

student loan program doing more harm

than good, where we actually are

we actually creating value from our higher education system in this country or not? And, and, and most importantly, is the

private market there because you look at the

Total debt outstanding $1.7 trillion dollars

there would be a

friedberg friedberg

don't sell beyond the clothes. The answer is no, we have a massive employment gap.

Okay. The data

tells you in every single which way

possible that we

are not educating our young people

to take the

jobs that are needed

for a high growth

functionally

moving economy.

We know that so

we are mis educating

these folks

and then we are giving them access

to enormous amounts of debt that they have no reasonable chance to pay back. And

I think that that should be

fixed by fixing the incentives of the universities.

You are right. Universities today

are for profit asset management businesses wrapped by this philanthropic do good or nonsense that they try to tell people

to get you to go there

And pay $50,000 a year in tuition.

It's a joke

and they come out and people to think that these degrees

are actually

going to make them successful humans,

they come out miseducated and undereducated and incapable of servicing the economy's needs separately. The other thing, if you take a step back and take student loan off the table for a second and just say any consumer handout that

touches less than you

know, 40 or 50% of the economy or of the population of a

country is

very precarious. So

Students student debt in this case 15

percent of the US population. So a lot of people, but

It also means that there's 80

5% who don't benefit,

What will those

85% of the people say when they have to foot the bill for the 5th, 1st 15%.

And then what do you think

happens with other kinds of debt? What happens when the oil lobby says forgive our debt because we're in a national energy crisis? What

what what will all the

climate folks? Well, it creates a slippery

slope. And

and and my last point on this

is to the extent that

we actually want to forgive student debt. I'm fine. If that's the law of the land, that's great,

it should go

to the floor

and issue to be debated

in Congress and it's a law that should be passed, but it should not be by

executive

edict trying to back in to buying votes in a midterm

election

sacks by the way?

Just on the politics

of that, I think this could potentially hurt them because to your

point, this is basically a

bailout of the woke professional class. It's the, it's the underemployed graduates of these

universities who

again, are members of the professional class. They majored in things that didn't increase their earnings potential.

Meanwhile, the majority of

The country is working class, something like 2/3

of the country is still working class,

meaning non college educated and they're

gonna have to pay for

this bailout in one way or

another. Either through higher taxes

or more deficit spending or more debt?

The burden of this bailout's

gonna fall on them. And why should they have to pay to play literally

like somebody working

in retail is paying for

somebody's graduate school degree in

creative writing or something

is completely and profoundly unfair

to the answer

to Freeburg question.

We actually know when executive

function fully matures and adults, it's

25 years old and that's when you can actually make

long term thinking. So

there is an argument that people should

not be allowed to take these

loans that

are not even

that you

can't get out of

or there should be some cap

on the amount of

loans you can take because

people at the age of

17, 18, 1920 are

absolutely not able to

make these decisions. There are

other programs as well that works. So in Canada I went to a school called the University of Waterloo

and Fantastic

Engineering School. The reason I went there and I did electrical engineering there is that they had a program where after the first year,

so the first year looks like

every other year at every other school.

Okay but you're

There for you know two semesters from September

to May. But

after that you

start working

And you alternate four months of work with four months of school and you get paid for that work. And what it allowed me to do

was graduate

with meaningfully less

debt. But it

also allowed me to graduate with a commercial skill set and I was

able to get a job

and in that moment actually I was working at a bank and I got profoundly lucky, which is, I worked for an individual and I was treating interest rate

derivatives

and I was learning to trade technology stocks on the side and this guy mike fisher, incredible human being

and I

Made in one year like 25 or 30,000

dollars for

him, He wrote me a check and he said, here you have $25,000 of student debt, go pay it off right now,

I'll let you cash out this

Whole book. I graduated with about 28,000 of debt, I had

about 8000,

I think I had a um somewhere

between

10 and 15,000, 10 and 20,000. And then I got my

first bonus check after my first

year of work after undergrad.

And I paid off all my

debt and it felt incredible,

incredible. It

was amazing when I paid

off my debt, I've never been in debt

since I

walked downstairs to the bank and I pay, I gave them the check and I endorsed it and I said, here's my student loan number

and I was like, oh my God,

I was free for the, it's like, it was an enormous sense of relief for me.

It was credit card debt I had accumulated on the

credit card cause I went to cal

I was like four grand a year to go to college. But but if,

if, if I didn't go to waterloo, I would have had double the debt because I wouldn't have had work. But then also like I think about all these

scenarios, I wouldn't have had

two years of work experience. I may not have gotten the job that I did at Bank of Montreal at the time, that may not have been able to give me a chance to meet mike fisher, all these things could have

happened. So you can't

rely on the luck of the butterfly effect so that you have a reasonable shot of building a good life, right?

So there are all these things

in universities that I think are really mismanaged today and they go and work against what is right in society.

So I'll give you another

example. The dean of the engineering school and the president of University of Waterloo was here

this week with me

and I asked them,

tell me about

these global rankings and they said, you know, it's just a really difficult game. They said if we wanted to compete to try to get high on the list,

we would

have to do the things

that would

undo all the things that made us great and unique in the first place and I was like, you know what I am such a huge supporter of this

school, please just

Continue to do what you're doing and I'm so proud that they have the strength to just stand on their own two ft but every other school is running this

shell game

of, you know, gerrymandering all of these statistics, trying to get high on

the list to trick some

parent to force their kids

to go to some

School to then graduate with $200,000 of debt to get a job that that doesn't

then give

them any line of sight to paying it off.

It is, I

don't think it's their kid's fault,

but you have to

reform the system. And I think the first thing you need to do is look inside these universities and hold these folks accountable.

I mean these incentive systems are just crazy. Um speaking about crazy, uh we

talked about Bill Lange

and his,

that's your transition,

that transition,

sorry, they can't all

be as elegant

and smooth.

Here's jake hell, he's looking at the agenda for

today and he sees

Bill Lange and he's

like, okay, how do I do this? How do I?

Crazy. Crazy. The linkages craziness, okay go no, no no no,

no, no, no. Hold on

the linkages, trillions and billions

and

trillions and trillion dollar mistakes

wang and his

CFO were arrested on Wednesday and charged

with racketeering,

wire fraud and

conspiracy, We talked

about this when it

happened. His firm

are

chewy

ghosts. I think it's

his

poorly named firm

and family office. We covered this in real

Time Back on Episode 28.

They famously lost

$20 billion dollars over two days when they

were margin called

back in March of

2021. He worked at Tiger management, yada yada

and it was at the

time reported that they were trading

billions of dollars at over

five X

leverage

according to the sec

complaint at its

peak, the firm was managing

36 billion With 100 and 60 billion of exposure, which is 4.5

times leverage,

but Archie

go so what however it's

pronounced started with only 1.5 billion in assets

in March

of 2020. So wang

Flipped 1.5

billion in capital into 160 billion of exposure in 12 months, essentially trading somewhere in the

Neighborhood of a 100-1

at its peak according to this complaint, um a bunch of banks have lost money Because they were supporting this. Credit Suisse lost 5.5 billion Morgan Stanley lost a billion ups 774 million. The new york times described it as quote orchestrating a stock manipulation scheme that

relied

on them masking

and concealing the

enormous risk they had taken.

The mafia had some

thoughts on this. I think so. First, I think

we should probably explain

how he did this, right? So

that's that's everybody's question is how did the banks let this

happen? Well, I think first it's

what's the mechanism.

So you know, there are ways

in capital markets

to take really extreme

bets this

way is called

what's called a total

return swap.

And so the

basic way that this works is

You have two people

on on each side of the trade.

And what you

basically say is let's agree on what's called the reference

asset. So I'll just use an example, let's just say

it's um, I think

Discovery was one of the companies

that they were trading. So

Discovery Communications,

let's look at, let's, that's the

reference asset that

stock

and what I'm

going to do is buy protection and what you're going to do is

um self

protection. And essentially what happens is

as

the stock goes

up and down, you're

going to net the difference between

these two people and when you do it

that way via a

derivative. So what

it, what it forces the person to do the bank in this case

is to go out and

buy the stock

okay.

Show that they are hedged in case the price goes up a

lot because they have to pay

that difference

in this case to Bill

huang. And if the price goes down,

Bill huang has to

pay that difference

back

to the

bank. So what happened is

that he went

to three different

banks morgan Stanley

Goldman Sachs and Credit

Suisse and effectively what he did

was he bought,

he he made these bets

across a handful of

names, but he did

it with so much

leverage that he ended

Up owning 60 or 70% of some of these companies.

And in March of last

year, when the stock market turned

over, um he owed them

enormous amounts of money,

so much so that

these banks had to unwind these trades, which caused further downdrafts in the stock and almost spilled over to the

broader stock market.

Jason that the numbers from the sec complaint are pretty crazy. As of March 31 of

2020

they had one

0.6 billion

invested

on a gross exposure

of 10.2

billion, which that what that means is they were able to go

and lever up this one

six billion to behave in

The market as if they had 10.2 billion By January one of 2021. So nine months

later They had 7.7 billion

dollars of invested capital. So they've done

really well, right, they made

70% on this 10

billion, but they leveled

that up again and so they had gross exposure of

$54 billion.

And then just

I think three months later, by

March 22nd,

They had $36 billion dollars

of invested capital, meaning they had

$36 billion dollars of cash.

This guy had taken one

six and spun it up 236 billion

in

in a year. But then he had leveled that up again and he had $160 billion dollars of gross

exposure and then the market

turned and he owed all this

money and so all these folks had

to get out of it, but

also alleged that he was trying to do short squeezes

on the stocks to try

to make them goose

even more. So there was a massive

manipulation because of his position size correct? Yes.

So this is what

happened, but then here's how it

is allowed to happen. So

if you try to do the same

thing in interest

rates, in the interest rates market

versus the equities market, it's not possible

why if I wanted to go

and buy a

credit default swap, effectively, think of

that as the same kind of thing he

did, but on the debt

of a company, on the debt of

discovery,

what

I would do is I would be able to

enter into that trade with the bank, but it

goes into a clearing house

and that

clearinghouses able to

tell all the banks

how much

risk is building up in the

system. And the reason we

implemented this clearing house was to

make sure coming out of the great

financial crisis, none

of that chaos ever happened again. But

we did not include the

equity markets in that

clearing house. And in the laws that regulated?

And so what

this is, is a very shadowy,

great part of the,

of the market that is poorly regulated.

That has

very little oversight. So what do the banks do the banks say to

you if you want to put this thing on, give me a

balance sheet. So I understand what the risk

is a piece

of paper, a report.

And I think what,

what they're alleging

is that

these guys lied

so that any individual bank

in this case, Goldman morgen and

Credit Suisse had no idea

because they kind of doctored these reports

to each other

and that's why that's

why all this risk built up in

the system,

it would be solved if you had a clearinghouse for equity derivatives the same way you have for interest rate derivatives. It is crazy to think that

somebody was doing

this and I thought

they would get away with it

and had been up

20 acts and the psychology

of these people, the madoffs of the world. I just find fascinating why

wouldn't he if he just

by the way we we talked

about how the three, the four of

us, we talked about

how the four of us are

Grinding to return to X. of our money in 10

Years. He's seven x.

Or 10 x to one

$.6 billion.

And it was not

enough. It's not enough people

have. I mean

what do you think the psychology of this is?

And that's what I'm trying to

figure out sacks. What's the psychology

of somebody who tries to

do this?

They're already a billionaire. They've already got their jet, they could go anywhere. They could have anything, they could buy any home, They could go on any vacation. Well that's? The thing I never understand

about these people is like

this has got to

be some crazy sociopathic

behavior Jekyll. Did you always want to jet? I just got a small business select on southwest when you started your career. What did you want

the next?

And that's what I want when you started, you wanted a house, right? And then you got the house and you wanted the home in Tahoe and then you or the home, you know the vacation home and then and then you wanted to do and then, I mean I don't know why this is confusing.

Well no,

but I don't want it enough to put my entire freedom

at risk or

to cheat. Apparently

this dude was a christian, I'll put that in quotes

because I don't, I mean

don't ran

ran bible study and stuff in the mornings. He lived in some modest house in Jersey

blah blah blah,

but you know, he

was a bit of a freaky deak.

What does that mean? I mean the guy could get, by the

way the dude was pinched

In 2012

for insider trading and had to pay a settlement and might

get back everybody's money that got pinched.

It's crazy

and it is what it is. You know you and your friends and I got pinched pinched pinched when you grew up in the streets, you know that is what happened to

this guy. I got pinched

the guy, a cheese, he didn't round, he ratted out his friends and he ratted out his friends. Now the CFO

got pinched to

flip them. This

is super deranged.

Speaking of the range transitions where we going, where are we going to do? Someone needs to take all of jake's health transitions from the last couple of shows and just put them together in a row. Just crazy deranged on Wednesday. The Department of homeland Security speaking of

billions

announced a disinformation governance board disinformation governance board. According to the announcement, the board will immediately immediately began focusing on misinformation aimed at

migrants

at the US mexican border. The board will be led by

disinformation

expert Nina. Thank you.

Its banquets. He

has research

Russian misinformation

tactics and online harassment. This is also the woman who sings

show tunes on

Tiktok this information, you should be running a disinformation board. You always have such a strong opinion and you have you have such a nose for what's Bs and what's not, here's what's

going on here. So first of all,

this woman claims to be an

expert in disinformation.

Let's evaluate that claim. She

was an active pusher of the Steele dossier

which turns out

is disinformation

for which people are now under indictment.

She

also was active

in trying to censor the hunter biden laptop story,

which as it now

turns out was not

disinformation. It was absolutely

true. As acknowledged

by the new york times the Washington post,

you would think that these blemishes on her record might

disqualify her from

being an expert on

disinformation. But actually in the view that people are hiring her, these are actually

qualifications because they

are not interested

in the truth. There is

the reason this department

is set up. And what they

mean by disinformation

is they have

hired her to push partisan

political points.

That's what's

going on here. That's what this information is. Now.

It used

to be that if you disagreed with somebody,

you just say, listen, I

disagree with you or maybe you're an idiot, whatever

you're wrong. But

now the way that these debates

are set up and the way they

work is

they don't just say you're

wrong or that's not

true. They try to label

used information so you can get you

censored.

And the point of hiring

this disinformation

czar is

is basically to

censor that is basically shut down the debate.

That that is basically the

whole point of this. You think

there's any timing here

with Ellen.

Yes, of course

it's it's

um well, it's it's there was a great tweet

about this conspiracy by the way, I don't think it's conspiracy theory. It's

there was a great tweet about this

that

that we live in a future

where it's like a mash up

of George

Orwell and Ayn rand because here you have,

you know, Elon

musk, the

heroic lone

entrepreneur trying to rescue freedom of

speech at the

same time, you have this Orwellian Ministry of

Truth being created

by the federal government. So, I

mean, no awareness of

naming.

Yeah, it's just bizarre. But

but the disturbing thing about

it is this information governance board

is such a dystopian

name. The

the the

thing about it that's a little bit scary here. I know you

play the video

of her doing

show tunes and it seems sort of silly. But the thing that's

scary is that this is under the

Homeland Security

Department

is that

they're it's it's the most

militarized department in our government. So it's really scary to put the Ministry

of Truth

under the department that has all

the soldiers of

Truth. It's not the

name of it, but it's

close, pretty darn close now now why is it there?

I'll tell you why

because this was built up to

there was a

a couple

of months ago is a news

story that we might have covered on the spot

where the

Homeland Security Department

redefined

disinformation

to

comprise. Uh

they they said it represented

an escalation of the terror threat level. So in other words, they

basically said

that disinformation

was tantamount to terrorism. Remember that when we talk about

that this

is the payoff to

that first, they

define, they basically defined the other side as being disinformation

of the debate as being

disinformation then they define

disinformation

as as basically terrorism.

Then they have the

Homeland uh Security Department which is supposed to be responsible terrorism, create this

Ministry of Truth. This is what's going

on here. It's really weird

just to remind everyone, there was concern in the last election.

I I'm going to play devil's advocate as I often find myself doing here,

that

just just to try and explain the world that that's the reason I often play

this role, because I'm trying to understand the world.

But you know, there was a real concern that, you know, the Russian government was

using, you

know, information

warfare and propaganda

through social media to influence

voting.

And um, and that that is considered a security threat to the integrity of our elections. Therefore, this is a homeland security issue. And there is a question mark, of course, that everyone has on how far they're going to go. Once you set this precedent, when would they ever stop in terms of quote, unquote policing information and policing? What's true and managing internal propaganda and internal media delivered to us by the government? That's the other side of the coin. But the primary side of the coin, the initial side, the initial

representation that I

think folks do have concerns around is how do

we keep foreign

actors from creating misinformation campaigns that go viral and influence elections and sex? I don't know if you think that that's a concern we should

or shouldn't have. But

how would you address it if you were the president and that was the the

challenge, you know, to like how do we stop that from

happening? Foreign

actors interfering in our

elections is

certainly a concern we should have.

It was actually

happening on a big scale or in a meaningful way. I mean, this is basically,

look, this is

basically a hoax, okay,

john Durham is

basically out there making indictments right now, proving the extent of the

spokes. It started with the

whole Steele dossier which was a piece of campaign

opposition research

that was

manufactured by

Hillary Clinton's campaign.

The lawyers

who basically produced it are under indictment

and that's where this

whole thing of Russian disinformation

came from.

And the only

proof for that thesis

Is that supposedly the Russians bought 100,000

dollars facebook

ads on

facebook. So I'm

not denying that that occurred. But

it was relatively

minor, was a drop

in the bucket of all the activity

going on around the world, to be clear to be clear.

That was just the ads

that were bought with with like credit cards that said like fsb on it like,

but who

facebook,

you probably,

you know, didn't count all

the number of credit cards that were

stolen. I'm pretty sure the Russians

are capable of stealing john smith's credit card and using that to

buy ads as well. So I

looked at those ads that you've seen

those ads, they were

ludicrous, they weren't gonna convince anybody of anything. I

mean, they had like

jesus

and the devil arm wrestling each other and the jesus figure was basically set and

the it was, you

know, it was just absurd. I mean, the

jesus figure was saying that they want

to be clear. It happened

and you've now stepped back your

position on like

it just wasn't that

scale to your opinion.

I

think, I think,

look, the the scale interference in the election was committed by Big

Tech. I mean, they

Censored the Hunter Biden Story two

weeks before the election.

It turns out that's a completely

true story that Hunter

biden has extensive business dealings

in

Ukraine, the country we are

now, but we are now deeply involved in a war

there

and that story, the

electorate had the right to take that

into account Big

Tech center, that

story. So there was a

reason for that. May I

respond to that just

to give people

like making

a very difficult decision. You have to remember

trump, asked Putin

onstage to

hack Hillary's

emails and they did, then

he asked the Ukraine

um

to take action against the

bidens or he wouldn't give them

support. He was impeached for that. So

if you

put yourself in the and I'm not saying twitter

made the right decision here,

but there was and there was

also sexual material, you know, people's nudes

which and hacked material

and nudes are against

the terms of service.

So

I think two things

happened concurrently.

One listen,

the people working at twitter or

98% liberal. They don't want Trump, they sort

of an existential threat.

And then to

they don't want to link to

hacked material. Oh

really? Well hold on

a second. Hold on. During the

whole Canadian trucker.

Let me finish this point

during that. I have to finish

my point the third point and then I'll

let you go. Is that in it? In addition to all that hunter biden

is completely a grifter go, okay, I agree with you on that

one. So

look during the whole Canadian trucker thing. Remember

when all the people who contributed to

those Canadian truckers, they got docs. I mean basically was a hacker who

leaked all the people who had

donated

and social networks were happy to print

all that information. So this idea

that they

censor hacked information is nonsense.

The

lives of Tiktok account just got docks by taylor Lorenz look

whether you think that was a good

idea or not. The

point is these principles are

invoked very selectively

when there's a story they want to

suppress. And the new york

times and the Washington post have both not come

out and said that the

laptop was real. It's been authenticated. The story was real and

this whole idea that it was disinformation

that was just invented.

I mean it was just

invented. Well no hacked. It wasn't that it was disinformation is that it was potentially hacked and you and trump, here's the thing trump set the stage for that

and

the the people on twitter

and facebook who

also made these decisions.

They were

Informed by three letter

agencies department of

Justice and FBI et cetera. Hey this is potentially hacked

material designed to interfere with the

election. Listen events and other Democratic party

operatives just made

up out of whole

cloth that the hunter biden story

was disinformation.

It was true. It's been

acknowledge is true.

The Washington post is is true. So hold on so it can improve.

No it's not about improving

it. Look well no, no I didn't hear my sentence. I think this is where social

media can improve which is

if they had to explain every one of these decisions

they make

in full in transparency. I think that's something Ellen

could bring to this

party which is if you're gonna block something we we need to know why and they'd never explain why and who made

the decision. And

I think that that transparency

would benefit situations like

this. If the doj or FBI told them this is hacked material, then they've got to go to the doj and said, hey you gotta give us cover here. If this is in fact hack material, you told us not

to print it.

We're not gonna print it. But it was just bizarre that

one publication got dinged like the new york

post, It didn't the oldest the oldest newspaper in America the oldest newspaper in America.

The bastion

of like it doesn't

matter, that's not for you to decide,

it's not for twitter

decides legitimate publication that had a true story and it was relevant to the election and

the american people should have been able to take that into account. And people like Nina

Jankiewicz, whatever our

new czar of the Ministry of

Truth, she

was out in the

forefront basically calling that story disinformation.

Meanwhile she's pushing

the Steele dossier which really wasn't

that story was

confirmed with biden have won.

I don't know, I don't know the answer to that, but the point is that

it should have been suppressed that was that was

election interference. Now Ellen came out this week and

specifically tweeted that that that was

basically a mistake that Jack

also said it was a bad, Jack said it was a mistake to

and Ellen repeated the same thing that

they shouldn't have done that. I

think there was an agree it's a bad

call in hindsight of

course. But in hindsight.

Right. But

what was the reaction to what Elon

said? He was accused

by virtue

of criticizing

the policy decision that twitter made that that was supposedly targeted harassment

of

the legal counsel at twitter who made the

decision who gets paid

$17 million dollars a

year to make those decisions.